Lessons From the World's Most Ruthless Competitor

Copycatters used to knock off designer shoes. Now they knock off online shoe sellers, daily-deal sites, and any other Internet-based business you can name. Is this just a fact of business in a connected world?

Deal With It To Oliver Samwer, king of the cloners, complaints about copycatting are just ridiculous.

IMAGE:

Hugh Kretschmer

Advertisement

The Billion-Dollar Idea came to Arne Bleckwenn suddenly and all at once:

What if travelers could use the Internet to book rooms in apartments just as easily as they could book rooms in hotels? What if there were a website that let people anywhere in the world rent out an apartment, a spare bedroom—hell, even an air mattress? Travelers would get a good deal, cash-strapped people with extra space could make a few extra bucks, and the $400 billion-per-year hotel industry would bleed money.

It was wacky, but somehow Bleckwenn knew it would work. He figured this new company could disrupt the hotel market the way eBay had disrupted the world of retail. He decided to give it a try.

Bleckwenn was just 28 at the time of his vision, but he was already an old hand at starting companies. He created an online forum for video game enthusiasts at 17 and turned it into a business at 19. "While everybody else I knew was partying, I hired people and got funding," he tells me over coffee in his offices. "That's when I decided this was what I wanted to do for the rest of my life." Since graduating from college, he had earned an M.B.A. and started two more companies—the most recent of which, GratisPay, he sold to a competitor for a seven-figure sum in February 2010.

By then, he was ready for something bigger, the kind of consumer-facing company he could brag to his friends about. He had been a backpacker all his adult life and liked the idea of helping independent travelers find places to crash. Plus, the economics of the business looked great. "In New York, you can stay at the W for $400 a night," he says. "Or you can stay in someone's apartment for $100. That's one-fourth the price. And the inventory of apartments is unlimited." Over the course of two months, he raised some seed capital and used it to build a slick website.

When I visit the company in March, just 11 months after its founding, Bleckwenn has 350 employees and is in the throes of wild growth. He expects to bring in $130 million in revenue this year. "When my last company went from zero to 80 employees, I thought it was the craziest thing that would ever happen to me," he says. "But this has been on a completely different level."

P erhaps this story sounds familiar. An ambitious twentysomething dreams up an Internet company, corrals some investors, and attracts customers by the millions. You might even think you've heard of Bleckwenn's company, which happens to sound an awful lot like Airbnb. That San Francisco company, which also lets anyone turn his apartment into his personal hotel, was created in 2007. The company's founders struggled to pay the bills before finally landing $20,000 in funding from Y Combinator. Last year, Airbnb surpassed 100,000 room listings, was hailed as the star of the annual South by Southwest Interactive conference, and picked up $112 million in venture capital funding.

But Bleckwenn isn't the founder of Airbnb—and though the story he tells me is true, it leaves out a crucial detail: The Billion-Dollar Idea was not his own. In founding his Berlin-based company, Wimdu, Bleckwenn reverse-engineered Airbnb's basic functions while borrowing liberally from its U.S. competitor's graphic design. He and his co-founder, Hinrich Dreiling, used a nearly identical page layout and a similar logo to Airbnb's. The bottom of Airbnb's page, which proudly proclaimed the company's press mentions in The New York Times and on CNN, could of course not be directly copied, because Wimdu had yet to be featured in any international media outlets. So Bleckwenn tweaked the wording—from as seen on to concept featured on—and left the logos in place.

In two months, Bleckwenn and his team reproduced what it had taken Airbnb's founders four years to create. They did it calmly and quickly, and they did it well. "It's just competition," Bleckwenn says. "Of course, Airbnb is unhappy."

There was another significant way that Bleckwenn's knockoff differed from the original: It had a lot more than $20,000 to work with. The investment that Bleckwenn described to me as "seed" capital was worth $20 million, and by June 2011, the company had raised $90 million. Much of the money came from Rocket Internet, the Berlin-based incubator whose 39-year-old co-founder, Oliver Samwer, is renowned for his effectiveness, his ruthlessness, and his penchant for shamelessly knocking off the brilliant creations of Silicon Valley's best and brightest.

In a country with one of the lowest rates of entrepreneurship in the world—Germans are so risk averse that most still don't use credit cards—Samwer is an anomaly: a swashbuckling Internet mogul with an estimated net worth of $1 billion. He is both the most important German entrepreneur and the most reviled. At the European Pirate Summit, a start-up conference held each September in Cologne, attendees burned a "copycat guy" effigy—an apparent reference to Samwer's affinity for unsubtle imitation. "It's almost impossible to compete with him," says Moritz Delbrück, the founder of Concern, a management consulting firm, and the guy who led the effigy burning. "He is more disciplined, he works harder, and he doesn't stop until he wins. Whatever is somehow legally possible, he'll do it."

Think of Rocket as a sort of Kinko's for Web start-ups—that is, if Kinko's were staffed by hyperaggressive German bankers and flush with hundreds of millions of dollars in investment capital from Russian oligarchs, Swedish billionaires, and Arab sovereign wealth funds. If you can think of a hot American start-up, odds are Samwer and his two brothers, Marc and Alexander, have cloned it somewhere around the world. They sold their group buying site, CityDeal, to Groupon for a stake that is now worth $700 million; their Zappos clone, Zalando, has 3,000 employees and revenue that is thought to be well in excess of $1 billion; and there are many, many other examples.

To give a sense: From the day I started reporting this story, last December, to the day this story went to press, in early May, Rocket created clones of Square, Fab, Zappos, and Amazon. Actually, there were two Amazons: one in Jakarta, called Lazada, and one in Istanbul, called Mizado. "I'm on drugs for growth," Samwer tells me when I visit his Munich office. "The fast growth. Formula 1, not golf."

There have always been copycat businesses, but over the past few years, technology has produced a new dynamic. "The pace of imitation is dramatically accelerating," says Oded Shenkar, a professor of global business at Ohio State University and the author of Copycats. By the 1980s, the time between the release of an innovative product and widespread imitation by competitors had fallen from several decades to several years. Today, even complex products like cars can be reverse-engineered and brought to market within a year. A successful Internet start-up can be knocked off in an afternoon. Most will be knocked off in a matter of months.

Perhaps unsurprisingly, American start-ups have not taken kindly to this copying. When Airbnb learned of Wimdu's existence, the company sent an irate e-mail to Airbnb users, which was subsequently published by TechCrunch: "We've discovered that these scam artists have a history of copying a website, aggressively poaching from their community, then attempting to sell the company back to the original," the note read.

Most of Silicon Valley—and the American business press—has generally nodded in agreement at statements like this. We Americans love originality, carving out a special place in corporate heaven for the people we imagine to be inventing the future—and a special place in hell for those who are making money by knocking it off.

But what, exactly, is wrong about imitation? Are copycats always bad for the companies they copy? And why do we insist on treating good business ideas like works of art that should never, ever be imitated?

"It's like a religion," says Shenkar, who argues that American businesses have come to place an unreasonable emphasis on innovation, ignoring the fact that many great companies—for instance, Southwest Airlines, Walmart, and everyone's beloved innovation case study, Apple—have been great imitators. Apple, after all, did not invent the MP3 player, the touchscreen smartphone, or the tablet computer; it borrowed other people's ideas and assembled them elegantly. "To have a start-up based on imitation is almost repulsive to most Americans," Shenkar says. "But that's nuts, if you ask me. As long as a company plays by the rules and does things legally, everything is legitimate. Why isn't it legitimate to use a business model that's been successful elsewhere in the world?"

B erlin seems, at first glance, a strange place for the kind of ruthless business execution for which Oliver Samwer is famous. During the Cold War, West Germany encouraged repopulation of the city by exempting Berliners from mandatory military service. That, combined with generous food subsidies and absurdly low rents—the city has been severely underpopulated since World War II—attracted artists, musicians (including David Bowie, Brian Eno, and Iggy Pop), and all manner of counterculturalists. Even today, Berlin is a place where everyone seems to have a side gig as a DJ. It is the hipster capital of the world—as the city's unofficial motto goes, "Arm, aber sexy," or, in English, "Poor, but sexy."

But the same things that make Berlin an ideal place to launch a performance-art career or to join a bicycle polo league also make it an ideal place to start Internet companies. Berlin may be poor and sexy, but it is also the capital of the world's fourth-largest economy and has the highest concentration of universities in all of Germany. Because unemployment remains high—13 percent, double the national average—and because the cost of living is so low, young engineers can be hired for a fraction of what they cost in any other wealthy country.

Though you are still far more likely to encounter an actor in Berlin than a knockoff artist, the ranks of the latter are growing. Besides Rocket, there are half a dozen Samwer wannabes, with names such as Team Europe, Springstar, Atlantic Ventures, and Found Fair. In December, 25 of Rocket's top lieutenants quit en masse to start their own incubator, called Project A. They quickly raised $65 million from the German retail giant Otto.

But none of these newer copycats have been able to match the track record of the original. "When you look at what Rocket has built, and you don't compare it to anything else, it's amazing," says Felix Petersen, the founder of Amen, a Berlin-based social-media company. "They have a success rate of 70 or 80 percent. It's almost a license to print money."

Samwer says he doesn't mind being called a copycat. "Most innovations come on top of other innovations, if you really look at it," he says. To Samwer, Airbnb's suggestion that Wimdu is a "scam" is as silly as the idea of Samsung's alerting customers about a Vizio scam of developing a similar flat-screen television and selling it for less money. "There's always competition," he says. "We win because we take our work very seriously."

For a man of slight build, average height, and a high, almost squeaky voice, Samwer is physically imposing. He is exceptionally fit, with severe features and cool blue eyes. He speaks at a breathtaking clip and stops only to look at his BlackBerry, which rings constantly. Samwer doesn't use a publicist or an assistant, answers his own phone, and doesn't make any appointments more than a day or two in advance. When he agreed to have his picture taken for this article, he asked me how I thought readers would react to the story. I told him I wasn't sure. "You know," he said, "I believe that people encounter each other more than once in a lifetime. I hope you'll take this into consideration."

Sometimes, this type of behavior has gotten Samwer into trouble. In a 1,297-word e-mail sent last October and widely reprinted and commented on, Samwer demanded a "full scale investment attack" in the online furniture industry. "The time for the blitzkrieg must be chosen wisely," he wrote, giving managers in Turkey, India, Australia, South Africa, and Southeast Asia the weekend to produce a plan for success—"signed with your blood." "Never forget," he concluded. "This is the last chance in your life! The chance for another billion dollar ecommerce company will never come again."

Samwer tells me he regrets evoking Nazi military strategy but rejects any further criticism of his style. "It doesn't touch me at all," he says. "What if I looked at all your e-mails and tried to find one that is not so nice and took it out of context? Apart from the inappropriate words, it's just passion."

I n the summer of 1998, as part of a business-school thesis project, Samwer and a classmate spent the summer in Silicon Valley interviewing entrepreneurs who had been on a list, published by Upside magazine, of the "hottest private companies." The 167-page paper that resulted from the research, which was eventually published as a book under the title America's Most Successful Startups: Lessons for Entrepreneurs, is almost comically German in its thoroughness. (For instance, Chapter 14, Section 5, Part 1, Subheading 6: "CEO lunches and employee breakfasts.") But Samwer's manual betrays an earnest fascination with start-up culture in the U.S. "The best thing about being in America was this inspiration thing," Samwer says. "Once you saw the American entrepreneurs, you wanted to be like them. You wanted to become them."

In 1999, he and his brothers set out to do that in a literal sense, launching Alando, a Berlin-based company modeled directly on eBay. Their timing was impeccable: Within a matter of months, eBay bought the company for $50 million. Over the next few years, the Samwers invested the money in a series of copycats—most prominently, StudiVZ, the Facebook of Germany (the name is short for the German word for student directory).

Though StudiVZ used a red color scheme rather than Facebook blue, it closely mimicked Mark Zuckerberg's design in most other ways, including layouts, graphics, and even the Poke feature. Facebook sued StudiVZ in 2008 in Germany and in California, alleging that the German competitor had infringed on its trade dress in a deliberate attempt to confuse customers. Facebook lost in German court. StudiVZ paid to settle the U.S. lawsuit, but by the time that happened, the Samwers were long gone, having sold the company for $134 million. They started Rocket in 2007.

A few days after I meet with Samwer, I visit Rocket's headquarters, a six-story office building on the old East German side of the Brandenburg Gate that houses 200 of the company's 500 employees. I listen as managing director Alexander Kudlich explains how he and Samwer decide which start-ups to imitate. The market must be big—$1 billion or more—and there must be a proven business model that has worked in another region. Rocket looks for "burger and beer opportunities," universal products and services that are not specific to a given culture or region. "Once we see those things come together, then we map the business model against countries and see where there are white spots," Kudlich says. "Then we do it."

The decision to copy a given business generally takes three hours to a couple of days; actually building the first version of the new company's website takes four to six weeks. "The speed at which you can make decisions here is amazing," says Brigitte Wittekind, a former McKinsey consultant who was recruited last year to create a clone of Birchbox, the New York start-up that offers samples of cosmetics to subscribers for $10 a month. Wittekind's company, Glossybox, spent its first year opening websites in 20 countries. It has 400 employees and 200,000 paid subscribers—twice as many as its American counterpart—and just launched in the United States, one of the few instances in which a Rocket clone will go head to head with the company on which it is modeled.

In exchange for the operational help and access to capital that the Samwers guarantee their founders, Wittekind had to agree to take almost no equity in the company she founded. Rocket holds a 58 percent stake in Glossybox; most of the rest of the equity is spread between Kinnevik, a Swedish investment concern that pumped $400 million into Rocket start-ups in 2011, and the Russian billionaire Leonard Blavatnik. Wittekind, her co-founder, and her employees own less than 7 percent of the shares outstanding.

This arrangement is typical at Rocket start-ups. Founders start with a salary of roughly $100,000, plus an equity stake of 2 percent to 10 percent. The package is designed to be competitive with salaries offered by investment banks and high-end management consulting firms. "We're creating an alternative career path for high potentials," says Kudlich. Though this vision of entrepreneurship probably sounds offensive to the average American entrepreneur, that's because it's not really entrepreneurship at all. "We take away the financing risk, the business-model risk, and the execution risk," Kudlich says. "It's a quite compelling proposition."

Of course, an army of M.B.A.'s and McKinsey alums might not be an army of entrepreneurs, but that doesn't mean they are not innovative. "We think that innovation is more than design and the first idea," Kudlich says. "Which is harder: to have the idea of selling shoes online or to build a supply chain and warehouse in Indonesia? Ideas are important. But other things are more important."

Telling a founder that ideas are not the most important thing is a bit like telling a writer that the crucial element of writing is making the paper his words are printed on. Even to the extent that it's true, it misses the point.

"I'm not against what the Samwers do; I just don't find it much fun," says Alexander Ljung, the co-founder of SoundCloud, an 80-person audio-sharing start-up (think YouTube without the pictures). Ljung, a Swedish musician and engineer, came to Berlin on a lark in 2007, and within a week, he knew he was moving the company here. SoundCloud now has 10 million users—a small percentage of whom pay as much as $500 a year for a professional account—and $63 million in venture funding. It is widely regarded as the most innovative start-up in the city.

SoundCloud hasn't been copied yet, but job listings for freelance programmers are littered with requests for help building a knockoff. (The going price seems to be roughly $500.) "Defense against imitators will need to be built into the design of every company," says Shenkar. That might mean offering products that are more difficult to copy because they are too technically challenging, or it might mean raising much larger amounts of money to expand internationally faster.

Then again, there's scant evidence that Samwer has done much direct damage to the American companies that have been copied. Rocket start-ups may be unoriginal, but competing with the companies that inspired them just isn't part of the model.

It is possible that Rocket's ability to build, for instance, the Amazon of Indonesia or the Zynga of Belgium may in the long term limit the growth prospects of those companies, but even this is not entirely certain. In 2010, Samwer helped found CityDeal, a brazen knockoff of Groupon and one of hundreds of Groupon clones that were attempted around the world. By the time Groupon bought CityDeal, just five months later, it had become the market leader in 13 European countries. "Oliver and his two brothers are known for elevating the practice of cloning American business models in Europe into an art form," wrote CEO Andrew Mason on Groupon's blog. "But…we realized that they were among the best operators we'd ever met." To acquire CityDeal, Mason paid a high price—14 percent of the equity in the combined company, a stake roughly equivalent to his own—and gave Samwer control of Groupon's international business.

It sounds like a lot for a months-old copycat, but in retrospect, it was a bargain. By the time Groupon filed to go public, a year later, Samwer's international division was contributing more than half the company's revenue. (Today, the contribution is two-thirds, and the rate of growth is double what it is in the U.S.) "Groupon wouldn't have been there if it wasn't for us," Samwer says, matter of factly. "This was the fastest Internet expansion ever done."

Which is probably why, after issuing its scathing letter about the "discovery" of a German clone factory, Airbnb did something strange: It hired its own group of copycat artists. In October of last year, the company announced that it was forming a partnership with the Berlin incubator Springstar.

Although Airbnb characterizes the relationship as one of "strategic cooperation," whereby Springstar provides advice on global expansion, it neglects to mention that Springstar specializes in international versions of start-ups, just like the alleged scammers at Rocket. Springstar's portfolio includes knockoffs of both Groupon and Zappos in Russia, Brazil, India, and Turkey. Airbnb has essentially turned over its international operations to copycat artists in exchange for an equity stake. Airbnb didn't buy a copycat; instead, it is paying to have one built for it.

I hadn't realized this until I visited Springstar's offices, expecting another Berlin-style incubator. But when I get there, a 27-year-old Springstar managing partner named Magnus Resch walks me straight into the nucleus of Airbnb's international operation; the two companies share an office. "We started with everybody here, and then we moved them to the individual countries," says Resch. Since partnering with Springstar, Airbnb has opened offices in Scandinavia, France, Brazil, and Russia, among other places.

Next, Resch walks me to the other side of the office to show me a company that he has been running personally. Fifteen or so young people are working on laptops amid piles of inexpensive-looking jewelry.

"It's a copycat," he says, landing on the last word with a grin. The start-up, Juvalia & You, was founded just two weeks earlier and is closely modeled on Stella & Dot, an eight-year-old San Francisco company that sells jewelry through a direct sales network.

The idea to start the company came to Resch in January, when he read an article about Stella & Dot's raising $37 million from Sequoia Capital at a valuation of nearly $400 million. "We thought, Wow, why is Sequoia doing this?" he says. "And then we looked at the per-unit economics, which are really incredible." In addition to the nascent German operation, Resch manages another 50 employees in the company's offices in Russia, India, and Brazil, where local Juvalia & You sites have recently opened for business.

"In the end, what we're doing here is entrepreneurship lite," he concedes. "Germans are incredibly risk averse. We are scared of doing something completely new. That's why we are so good at copying."

I ask Resch if he has heard from Jessica Herrin, Stella & Dot's founder. Has the company complained? He laughs.